US STOCKS-Wall Street slides on Middle East tensions, weak manufacturing data

* U.S. air strike in Iraq kills head of Iran's Quds Force
* Manufacturing sector contraction sparks slowdown concerns
* Bank, airline stocks tumble; defense stocks rise
* Indexes down: Dow 0.61%, S&P 0.47%, Nasdaq 0.52%

(Updates to late afternoon, changes byline, adds NEW YORK
dateline)
By April Joyner
NEW YORK, Jan 3 (Reuters) - Wall Street fell from record
highs on Friday after a U.S. air strike in Iraq ratcheted up
tensions in the Middle East and a bigger-than-expected
contraction in the U.S. manufacturing sector raised concerns of
slowing economic growth.
Demand for safe-haven assets soared as Iran vowed revenge
for the killing of Qassem Soleimani, head of its elite Quds
Force, in an air strike authorized by U.S. President Donald
Trump. In a further blow to U.S. market sentiment, data from the
Institute for Supply Management showed that U.S. factory
activity contracted in December by the most in more than a
decade. S&P 500 bank stocks .SPXBK dropped 1.4% as the news sent
benchmark U.S. bond yields US10YT=RR to their lowest since
Dec. 12.
Shares of airlines also tumbled as oil prices jumped about
3%. American Airlines Group Inc AAL.O shares dropped 4.4%,
while shares of United Airlines Holdings Inc UAL.O fell 2.0%.
Among the S&P 500's 11 major sectors, only real estate
.SPLRCR , utilities .SPLRCU and consumer staples .SPLRCS -
all considered defensive plays - were trading higher.
Shares of U.S. defense companies jumped on news of the air
strike. Northrop Grumman Corp NOC.N shares climbed 5.3%, and
Lockheed Martin Corp LMT.N shares rose 3.3%. The two provided
the biggest boosts to the S&P 500. "Markets don't like risk, and with the killing of the
Iranian general, we may have an elevated level of
counterattacks," said Wayne Wicker, chief investment officer of
Vantagepoint Investment Advisers in Washington.
Still, the market disturbance could be fleeting, according
to Wicker. "We've looked at many types of conflicts over the
last 20 years, and they've had much more of a short-term
impact," he said.
In a sign of investor jitters on Friday, Wall Street's major
indexes extended their fall following a false report of an
attack on a U.S. military base in Iraq. By contrast, release of minutes from the December policy
meeting of the Federal Reserve, in which policymakers agreed
interest rates would likely stay on hold for "a time," had
little impact on U.S. stocks.
The Dow Jones Industrial Average .DJI fell 176.25 points,
or 0.61%, to 28,692.55, the S&P 500 .SPX lost 15.37 points, or
0.47%, to 3,242.48 and the Nasdaq Composite .IXIC dropped
47.26 points, or 0.52%, to 9,044.93.
Among advancers, Tesla Inc TSLA.O shares hit a record high
and were last up 3.5% after the automaker beat estimates for
vehicle deliveries in the fourth quarter. Lamb Weston Holdings Inc LW.N shares surged 11.6%, the
biggest percentage gain on the S&P 500, after the frozen foods
supplier's quarterly results surpassed estimates.
Shares of retailer L Brands Inc LB.N rose 7.7% after Bank
of America upgraded its rating on the company's stock.
Declining issues outnumbered advancing ones on the NYSE by a
1.17-to-1 ratio; on Nasdaq, a 1.68-to-1 ratio favored decliners.
The S&P 500 posted 19 new 52-week highs and one new low; the
Nasdaq Composite recorded 52 new highs and 12 new lows.